In my outlook for 2012 I anticipated recession in the U.S., which I reiterated at the end of February.

As another two months have passed since then, I will review the macro trajectory again. The punch line is that I still expect recession in the U.S. this year. And the U.S. may already be in recession, although the markets are not exhibiting awareness of it.

My reiteration of recession expectations at the end of February and my

advice since

that QE3 was still coming was borne out of rising expectations of the opposite being expressed by many at the time and was causing stress for clients and some subscribers here.

A lot can change in two months.

Yesterday, both Pimco's Bill Gross and Jan Hatzius of Goldman Sachs joined the QE3-is-coming bandwagon with expectations of an announcement of such in June.

But there is a very serious problem this time that I also addressed a few days ago and that's the transmission mechanism for Fed monetary policy is broken.

There are two fundamental purposes for current Fed policy: keep the banks solvent and liquid and stimulate lending and borrowing. The more good loans are made out the front door the faster the banks can absorb losses on their existing bad loans.

About 80% of money center lending is for mortgages and most problem loans are there too. As such Fed stimulus is supposed to drive down mortgage rates to attract borrowers. It's not working and another round of QE3 isn't going to change that, regardless of what the Fed buys.

It will cause bank profits to increase affording for faster absorption of losses and an acceleration to the point where they can compete for mortgage borrowers again, driving down mortgage rates in the process. Until then

Wells Fargo

(WFC) - Get Report

, as the strongest money center, is for practical purposes setting the mortgage rates for the US, regardless of what the Fed does.

On economic activity,

it is slowing


And this is not just a U.S. phenomenon. Sovereign bond yields in the U.K. and Germany are at all-time record lows, while the US and Japan are approaching theirs.

Specifically, in the U.S. the rate of increase in consumption is not matched by an increase in incomes. Just as the Fed transmission mechanism is broken, so is the symbiotic and synergistic circular relationship between consumption and income.

Just as consumption leads all economic activity, including production and job creation, it also leads income. The closing of the virtuous cycle loop in an expansion occurs when consumption increases lead to income increases, which lead to more consumption.

That is not happening.

But more importantly, is that if that loop does not close the reverse happens and the failure of incomes to increase causes consumption to again decline.

That is what is likely beginning to happen now and it too feeds back on to itself and leads to recession.

At the time of publication, Arnold xxxx.

Roger Arnold is the chief economist for ALM Advisors, a Pasadena, Calif.-based money management firm specializing in income-generating portfolios. Concurrent with his other business responsibilities, Arnold was a radio talk show host for 15 years. He focuses on behavioral economics and chaos theory, better known as the "butterfly effect." He explains the relationships between political, economic and social systems, and how they are all reflected in the financial markets -- stocks, bonds, commodities, currencies and real estate.